Gold Juniors Defy Odds: Erdene and Rio2 Edge Closer to Production Milestone

• Peter Akerley, CEO of Erdene Resource Development, and Alex Black, Executive Chairman of Rio2, discuss their gold exploration and development projects in Mongolia and Chile respectively
• Erdene is on track to begin gold production in 2025, while Rio2 will begin production in early 2026
• Geopolitical risks, inflation, and rising energy costs are tailwinds for the gold price outlook
• Junior gold companies often struggle to get proper valuation from the market until they demonstrate clear progress toward production
• Partnering with companies that have mining expertise and access to capital is key for junior explorers to advance projects to production

The gold mining sector is notoriously challenging for junior exploration companies. Many promising discoveries never become mines as the steep capital requirements and long timelines exceed the capacity of most small-cap companies. However, a select group of gold explorers are defying the odds and rapidly advancing projects toward production. Two prime examples are Erdene Resource Development and Rio2 Limited.

Erdene Resource's Current Status

Erdene Resource Development is developing the Bayan Khundii project in southwestern Mongolia. CEO Peter Akerley explains that after over a decade exploring in the country, they have identified a brand new gold district.

We've decided to build a foundation with Bayan Khundii but there's expansion opportunities everywhere. This will be a multi-million ounce camp.

Erdene has partnered with Mongolian Mining Corporation to fund and develop an initial operation. First gold is expected in the third quarter of 2025 after a roughly two year construction period. At a $1800 gold price, Bayan Khundii has an after-tax NPV₅ of nearly US$170 million. Erdene's current market cap is around US$146 million.

Rio2's Current Status

11,000 miles away in the Atacama Desert of northern Chile, Rio2 Limited is putting the finishing touches on its Fenix Gold Mine. Like Erdene, Rio2 has secured a major funding partner, in their case Wheaton Precious Metals. 

Rio2: Is fully funded with:

• $25 million stream money
• $100 million pre-pay
• $45 million US in bank
• $20 million cost overrun facility with Wheaton

Rio2 Executive Chairman Alex Black emphasizes they are taking a fit-for-purpose approach. The company originally envisioned a larger scale project but opted to "right-size" the operation and get to production quicker.

Becoming self-sufficient comes from generating cash flow. Once we can do that, we can remove ourselves from this market even though we're in it and forget about it and just put our heads down and generate cash.

Fenix hosts a 5 million ounce gold reserve, providing a long mine life and expansion potential. Black sees clear potential to grow the resource.

We're already starting with 5 million ounces there, what we have to show is the path to expansion which we'll do during this year. That was part of the announcement that we made today, was the fact that we've started our expansion study.

Ready for Transition

While Erdene and Rio2 have taken different paths, both are on the cusp of a major transition from developer to producer status. Their respective leaders lament that the market has yet to reward their accomplishments, despite significantly derisking their projects. Alex Black notes: 

I've got a project that we're going to build at 100,000 ounces run rate and at the current gold price has got an NPV of about $800 million, and the market value of my company is currently less than $200 million. And it just goes sideways for most of the time. Will we get a re-rating as we get closer to production? I don't know, you would expect we would but we're not getting the recognition for where we're at yet, I don't think.

Akerley has had a similar experience but sees things starting to change.

We've seen a move in value from I guess September of last year to today of about a double. We were hovering in that 30 cent range and hit as high as 60-70 cents over the past few months so it's coming, it's coming slowly, not as quickly as I'd like but it's taking place.

Favorable factors for gold mining development:

Geopolitical Instability: Russia's invasion of Ukraine has heightened geopolitical risks globally. China-Taiwan tensions are at the highest level in decades. Gold is seen as a safe haven in times of crisis. Akerley explains 

Central banks will continue to buy you know, interest rates and inflation a bit of a contradiction there, we'll see where that falls but I think central bank buying and geopolitics really underpins the price of gold.

Inflation and Currency Risk: After years of low inflation, prices are now rising at the fastest pace in four decades in many countries. This makes gold an attractive hedge. A strong US dollar has kept gold prices somewhat range-bound in USD terms, but the precious metal is making new highs in many other currencies. Both Executives highlighted the positive impacts of operating in countries with weaker currencies relative to the USD. This provides a tailwind to margins.

Supply Constraints: Gold mine production has been stagnant for the past five years as miners struggle with depleting reserves and a lack of new discoveries. Black argues 

The intention of every junior resource company should be to find a deposit of something, whatever it might be, and to build it. Too many people talk about, 'Wow, we're going to... you know, and we're just going to grow the resource, and then we're going to get taken out,' right? That doesn't happen.

ESG Pressures: Increased focus on environmental, social, and governance issues is making it harder than ever to build gold mines. Rio2 has first-hand experience with permitting challenges in Chile. The company's original Environmental Impact Assessment for Fenix was rejected in 2022. While Rio2 was able to redesign the project to win approval, not all projects will be so fortunate. This will further constrain gold supply growth.

Management Strength: Both Erdene and Rio2 are led by experienced management teams with track records of exploration and development success. Equally important, both have secured strategic partners to provide capital and construction expertise. Access to funding and technical capabilities will be key differentiators for juniors.

Key Takeaways:

The gold exploration and development space is not for the faint of heart. Even companies with multi-million ounce discoveries face long odds in bringing a mine into production. However, the companies that do succeed can generate outsized returns for shareholders. Erdene Resource Development and Rio2 provide case studies of juniors on the cusp of this transition.

With first gold pours months away and fully-funded through construction, both companies are expected to gain from rising gold prices. Their projects have been largely derisked and yet their valuations remain disconnected from their underlying asset values. As their Executives point out, producing gold companies trade at substantial premiums to explorers and developers. The producer status could lead to share price appreciation of several times over the next 24 months.

Of course, risks remain. Cost overruns, delays, permitting, and community opposition can derail even the most promising projects. But Erdene and Rio2 have already overcome many of these hurdles. With their strategic partnerships in place and construction well underway, the odds are shifting in their favor.